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How Much Should You Read Into Canara Bank’s Quarterly Earnings: QuickTake

Is relief around the corner for India’s public sector banks and corporate lenders? That’s the question that comes to mind as you look at the first quarter earnings of Canara Bank.

Shares of the lender rose 7 percent on Thursday as markets digested earnings reported the previous evening. For the first quarter, the bank reported a small net profit of Rs 281 crore. Before you scoff at that number, recall that the bank had reported a net loss of Rs 4,860 crore in the fourth quarter of last year.

The bank, in a press release, explained that cash recoveries improved 56 percent on a quarter-on-quarter basis to Rs 3,537 crore. Bhushan Steel Ltd. and Electrosteel Steels Ltd. are two large accounts where resolutions were completed this quarter, leading to a jump in recoveries for the bank.

Should this recovery be extrapolated into believing that things will improve for public sector banks from here? If you go by the move into public sector bank stocks, you would certainly think so.

But there a few things to keep in mind before anyone celebrates the return of public sector banks.

1. Recoveries Will Be Lumpy And Unpredictable

The first factor worth remembering is that non-performing assets in this cycle are large and lumpy. Bhushan Steel and Electrosteel Steels were among the 12 largest stressed loan accounts. Both of them also belonged to the steel sector, which is on an upswing. As such, recovery from these accounts was perhaps easier than it will be in most other cases. Of the top 12 accounts, so far five have been resolved.

The haircuts across these accounts have been varied from a low of 37 percent in the case of Bhushan Steel, to a high of 87 percent in the case of Alok Industries.

Among the remaining seven of the top 12 accounts, the prospects for recovery may be high in the case of some like Essar Steel. In other cases like Lanco Infratech Ltd. and others, the prospects of large recoveries are not as bright.

That’s the first 12 accounts, which accounted for about 25 percent of the bad loans. For the second list, which includes 28 accounts with loans worth Rs 1.8 lakh crore, only four are close to resolution, BloombergQuint reported in June.

The short point – while recoveries will help corporate lenders in the coming quarter, the extent of recovery remains unpredictable.

2. There Is Still Fresh Pain Building

It is also important to remember that there is still some pain in the offing for banks. Canara Bank, for instance, reported fresh slippages of Rs 4,200 crore in the April-June quarter. Apart from corporate loans, there are lingering concerns of stress emerging from amidst small and medium enterprises.

Another key uncertainty is the impact of the Reserve Bank of India’s February 12 circular. The circular had set a 180-day deadline to resolve defaulting accounts. That deadline ends by September.

Some of these accounts may already be tagged as NPAs but if they go into insolvency, the provisions that banks need to set aside will rise.

According to a report in the Economic Times, there is still some discussion on extending the deadline for power sector accounts. Should that happen, banks will see some relief.

3. Path To Recovery Easier Than Path To Growth?

The final issue to ponder is a long-term one (for those still interested in the long term). Recoveries may start to happen. They have to, eventually. But is there a clear path to recovery for public sector banks? And if so, which banks?

Eleven public sector banks are still under the RBI’s prompt corrective action framework. Most of the capital they have received from the government will go into cleaning up their books. Will they have enough left over to get back to growth and will the RBI ease its restrictions on these lenders enough for them to expand?

If not, will the larger PSU banks be the ones that will gain disproportionately? Will they not only see larger recoveries but also grab a larger share of the growth?